Worsening growth prospects for the Eurozone will also make it more challenging for Spain to reach its ambitious fiscal targets, the ratings agency added.
Spain could be downgraded again if the Eurozone debt crisis escalates further, Moody’s warned.
“Since placing Spain's ratings under review in late July, no credible resolution of the current sovereign debt crisis has emerged, and it will in any event take time for confidence in the area’s political cohesion and growth prospects to be fully restored,” Moody’s said in a report.
The downgrade puts more pressure on Eurozone leaders, who will meet this weekend to discuss a solution for the crisis. Reports last night suggested that Germany and France have agreed to boost the Eurozone’s bailout fund to €2 trillion, causing markets to rally.
Moody’s downgrade on Spain was the third received from the big-three ratings agencies in the past few weeks. Moody's was more aggressive than its rivals, however, cutting the country’s ratings to A1 from Aa2.